Brexit Hobbles Japan Inc. as Rising Yen Weighs On Profit Outlook

(Bloomberg) -- Japan Inc. is already counting the cost of Brexit. The yen's extended surge after U.K.'s decision to exit the EU has turned the outlook for a gain in annual profit to the first decline in four years.

Take Toyota Motor Corp. Since the June 23 Brexit vote, the mean forecast for net income at the world's biggest automaker has slid to $16.5 billion, with four analysts cutting their predictions by an average $2.3 billion for the fiscal year that started April 1. The referendum outcome triggered the yen's biggest one-day advance in almost 18 years, taking its gains against the dollar in 2016 to 17 percent, the best among developed nations.

Profit estimates for Nissan Motor Co. and Canon Inc. were also cut by analysts after the referendum vote pushed up the yen, paring the value of income from overseas. Growth concerns in Europe after the referendum and the currency's gains are casting a shadow on exports and threatening to derail Prime Minister Shinzo Abe's efforts to free Asia's second-biggest economy from deflation.

“Abenomics is finished,” said Takuji Okubo, Tokyo-based chief economist at Japan Macro Advisors. “The yen appreciation will be the largest impact from Brexit to Japan. Japanese corporate profits will decline and how much they will decline depends on how much the yen appreciates. There is significant risk the yen could increase very sharply to 90 yen against the dollar.”

Earnings at 200 of Japan's largest companies would drop about 3.6 percent in the fiscal year, Daiwa Securities Group Inc. estimates, based on the yen averaging 100 against the dollar and 115 against the euro during the year. The currency traded at about 103 yen as of July 4. Should the dollar average 105 yen, current profit would drop 0.5 percent, Daiwa estimates.

“The yen is strengthening against several currencies and this is weighing heavily on earnings at Japanese automakers,” Tokyo-based analysts led by Kota Yuzawa at Goldman Sachs Group Inc., wrote in a report. “We revise Goldman Sachs estimates following the U.K.'s referendum vote to leave the EU.” The company lowered its Toyota operating profit forecast by 21 percent to 1.78 trillion yen ($17.4 billion) for this fiscal year.

Cost-Cut Efforts

Toyota said its approach to maintaining production of 3 million vehicles in Japan hasn't changed, and that its system isn't dictated by “short-term factors such as exchange rates, regardless of how much the business environment fluctuates.” If analysts are right with their predictions, it would be Toyota's first drop in profit in five years.

Canon declined to comment. Nissan said it desires exchange-rate stability and it is “always working to create a business structure that minimizes exchange-rate volatility.”

Suzuki Motor Corp. said the Indian rupee and the euro have the biggest impact on its earnings.

“We are going to cope with a stronger yen through further cost-cut efforts and local production,” Takashi Iwatsuki, a corporate director in charge of overseas sales at Suzuki, told shareholders at a meeting last week.

The prospect of lower profit is also adding to pressure on Bank of Japan Governor Haruhiko Kuroda to expand monetary stimulus at the central bank's policy meeting later this month. Failing to take that step may make the yen rise even further, said Hiroaki Muto, chief economist at Tokai Tokyo Research Center.

More conservative profit forecasts would signal bleaker prospects for growth in key export markets including Europe, China and the U.S. Japan's exports fell 11 percent in May, an eighth monthly decline as shipments to all three trading partners slumped.

Pretty Serious

“You're in trouble if you're exporting,” said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo. “If the currency changes slowly over a period of a couple of years you can adjust, but if it moves very quickly like it has, you cannot adjust so quickly -- it's pretty serious.”    

The Brexit vote may cost automakers worldwide about 2.8 million light-vehicle sales through 2018, researcher IHS Automotive said in its latest projections for the industry. Global stock markets that were whipsawed after the referendum may suffer more, according to Olav Chen, who oversees 80 billion kroner ($9.6 billion) at Storebrand Asset Management, a tactical asset allocation unit of Norway's biggest listed life insurer.

Since Abe assumed office, corporate profits have been up for three years, while the Topix index has climbed 50 percent.

Some Japan Inc. stalwarts are benefiting. The shift in fortunes for manufacturers has boosted the relative market value of companies less affected by foreign exchange fluctuations. Three of Japan's four biggest companies are now telecommunications carriers and analysts have increased earnings estimates for each of them following Brexit.

Still, there are concerns about growth in Europe in addition to the yen appreciation. Masataka Kunugimoto, an analyst with Nomura Securities Co., said in a report after the Brexit vote that the company has lowered growth forecasts for the European car market for this fiscal year and next. He also slashed his operating profit forecast for Toyota by 309 billion yen to 1.77 trillion yen.

“We have lowered our earnings forecasts on the Brexit vote, which we expect to lead to substantial yen appreciation,” Kunugimoto said in the report.

--With assistance from Kurt Schussler Ma Jie Pavel Alpeyev and Jason Gale To contact the reporter on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net. To contact the editors responsible for this story: Young-Sam Cho at ycho2@bloomberg.net, Anand Krishnamoorthy at anandk@bloomberg.net, Dave McCombs, Sam Nagarajan